NXP Semiconductors NV (NXPI) — Q3 2022 Earnings Call Transcript

Thank you, Josh and good morning everyone. Welcome to the NXP Semiconductors' third quarter 2022 earnings call. With me on the call today is Kurt Sievers, NXP's President and CEO; and Bill Betz, our CFO. The call today is being recorded and will be available for replay from our corporate website. Today's call will include forward-looking statements that involve risks and uncertainties that could cause NXP's results to differ materially from management's current expectations. These risks and uncertainties include, but are not limited to, statements regarding the continued impact of the COVID-19 pandemic on our business, the macroeconomic impact on the specific end markets in which we operate, the sale of new and existing products, and our expectations for the financial results for the fourth quarter of 2022. Please be reminded that NXP undertakes no obligation to revise or update publicly any forward-looking statements. For a full disclosure on forward-looking statements, please refer to our press release. Additionally, we will refer to certain non-GAAP financial measures, which are driven primarily by discrete events that management does not consider to be directly related to NXP's underlying core operating performance. Pursuant to Regulation G, NXP has provided reconciliations of the non-GAAP financial measures to the most directly comparable GAAP measures in our third quarter 2022 earnings press release, which will be furnished to the SEC on Form 8-K and be available on NXP's website in the Investor Relations section at nxp.com. Now, I'd like to turn the call over to Kurt.

Thank you, Jeff and good morning everyone. We appreciate you joining our call today. Now, let me begin with a review of our quarter three performance. Our revenue was $20 million better than the midpoint of our guidance with performance in the Mobile, Automotive, and Communication Infrastructure markets all better than our expectations. For the consumer exposed IoT subset of the Industrial & IoT market, we started to experience weaker sell-through in the channel. And let me remind you that our consumer IoT exposure is approximately 40% of the Industrial and IoT segment revenue. It is made up of thousands of customers primarily in China and serviced through our distribution partners. Taken together, NXP delivered quarter three revenue of $3.45 billion, an increase of 20% year-on-year. Our non-GAAP operating margin in quarter three was a record 36.9%, 340 basis points better than the year ago period and 80 basis points above the midpoint of our guidance. Our results reflect strong execution with solid profit fall-through on the incrementally higher revenue and better than guided operating leverage. Notwithstanding our results, which surpassed our guidance, we are facing a tricky demand environment. On the one hand, the demand trends from automotive and core industrial customers are very resilient. And we continue to face supply constraints across multiple microcontroller and advanced analog products. On the other hand, we see weakness in the broad consumer IoT and in the Android mobile market. Given that unbalanced dynamic of the demand environment, we are going to pull those levers that are in our control, namely stringent channel inventory management and discipline and discretionary operating expense. In terms of inventory, we have decided to take a Draconian approach to managing our distribution channel inventory. Specifically, our quarter four guidance contemplates a channel inventory at the 1.6 months of supply level, which is in line with quarter three and well-below our long-term model. We prefer to keep any incremental inventory on our balance sheet, where we have the ability to control and redirect shipments as needed. And in terms of discretionary spending, amongst others, we are slowing the rate of hiring. All-in-all, we believe these measures are a prudent approach until such time as we see a clearer and more consistent view of the demand environment. Now let me turn to the specific trends in our focus end markets. In automotive, revenue in Q3 was $1.8 billion, up 24% year-on-year, near the high end of guidance. In Industrial and IoT, revenue was $713 million, up 17% year-on-year, $32 million below our guidance. In Mobile, revenue was $410 million, up 19% year-on-year, $30 million better than our guidance. And lastly, Communication Infrastructure & Other revenue was $518 million, up 14% year-on-year, slightly above our guidance. Now let me look at key operating indicators relative to the noted demand dynamics, where we see the following. In terms of quoted product lead times, overall, we dropped to just below 70% of our portfolio with lead times that are greater than 52 weeks. This metric was greater than 80% a quarter ago. While this is in aggregate an improvement from prior periods, we continue to be sold out through 2023 in the automotive and core industrial end markets. In terms of our NCNR program, most of our automotive and core industrial customers continue to demand assured supply for 2023. Our 2023 NCNR order book continues to surpass our 2023 supply capability as well as the level of NCNR orders, which have been requested for 2022. And in terms of inventory, as noted previously, our Q4 guidance contemplates distribution channel at 1.6 months, well-below our long-term target of 2.5 months. With respect to on-hand inventory at NXP, our Days Inventory Outstanding (DIO) has increased five days sequentially to 99 days, and it will increase further. Given the application-specific nature of our product portfolio, we are comfortable with this direction. Now let me turn to our expectations for quarter four. We are guiding revenue at $3.3 billion, up about 9% versus the fourth quarter of 2021, within a range of up 5% to up 12% year-on-year. And from a sequential perspective, this represents a decline of about 4%, at the midpoint versus the prior quarter. At the midpoint, we anticipate the following trends in our business. Automotive is expected to be up in the high teens on a percent basis versus quarter four 2021 and flattish versus quarter three 2022. Industrial and IoT is expected to be down in the low double-digit range on a percentage basis year-on-year and down in the high teens range versus quarter three 2022. Mobile is expected to be up in the low single-digit range year-on-year and down in the upper single-digit range versus quarter three 2022. And finally, Communication Infrastructure and Other is expected to be up in the low teens range versus the same period a year ago and flattish on a sequential basis. Now in summary, there is a real dichotomy in the various end markets that we serve. The potential for some demand destruction in the consumer end markets that we noted as a concern last quarter has materialized. While we could ship more into the channel, we are taking a proactive stance to limit channel inventory buildup. And conversely, we are seeing very resilient customer demand in the Automotive and core Industrial segments, where demand continues to outpace supply, which hinders us from shipping to the true end demand. So, overall, we remain cautious in the near term due to the uncertainties in the macro environment. And with that, now I would like to pass the call over to you, Bill, for a review of our financial performance.

Thank you, Kurt, and good morning to everyone on today's call. As Kurt has already covered the drivers of the revenue during Q3 and provided our revenue outlook for Q4, I will move to the financial highlights. Overall, our Q3 financial performance was very good. Revenue was $20 million above the midpoint of our guidance range. And both non-GAAP gross profit and non-GAAP operating profit were above the midpoint of our guidance. Now moving to the details of Q3. Total revenue was $3.45 billion, up 20% year-on-year, notwithstanding weakness in the consumer-centric portion of the Industrial and IoT segment. We generated $1.99 billion in non-GAAP gross profit and reported a non-GAAP gross margin of 58%, up 150 basis points year-on-year and both above the midpoint of guidance range, as a result of higher factory utilization and higher sales volume. Total non-GAAP operating expenses were $730 million or 21.2%, up $73 million year-on-year and up $6 million from Q2, better than our guidance range and below our long-term model. From a total operating profit perspective, non-GAAP operating profit was $1.27 billion, and non-GAAP operating margin was 36.9%, up 340 basis points year-on-year and both above the midpoint of the guidance range. Non-GAAP interest expense was $91 million, with cash taxes for ongoing operations of $160 million or a 13.6% effective cash tax rate. And non-controlling interest was about $12 million. Stock-based compensation, which is not included in our non-GAAP earnings, was $89 million. Now I would like to turn to the changes in our cash and debt. Our total debt at the end of Q3 was $11.16 billion, flat sequentially. Our ending cash position was $3.76 billion, up $214 million sequentially, thanks to improved operating performance. The resulting net debt was $7.40 billion. And we exited the quarter with a trailing 12-month adjusted EBITDA of $5.3 billion. Our ratio of net debt to trailing 12-month adjusted EBITDA at the end of Q3 was 1.4 times, and our 12-month adjusted EBITDA interest coverage was 13.8 times. Turning to working capital metrics. Days of inventory was 99 days, an increase of five days sequentially, as we continue to experience incrementally improved supply trends. The increase in on-hand inventory was evenly split between raw materials and work in process to support revenue growth in subsequent periods and an increase in finished goods due to the noted weakness in the Android mobile market and the consumer-centric portion of Industrial and IoT. As Kurt mentioned, we continue to tightly manage our channel inventory. Inventory in the channel was 1.6 months and continues to be well below our long-term target. Days receivable were 27 days, flat sequentially. And days payable were 96, an increase of two days versus the prior quarter. Taken together, our cash conversion cycle was 30 days. Our working capital management, balance sheet and channel metrics continue to be very strong and well managed. Cash flow from operations was $1.14 billion, and net CapEx was $281 million or 8.2% of revenue, resulting in a non-GAAP free cash flow of $863 million or 25% of revenue. During Q3, we paid $223 million in cash dividends, and we repurchased $400 million of NXP shares. In addition, since the beginning of Q4 through October 28, we purchased an additional $260 million of shares under the established 10b5-1 program. On a trailing 12-month basis through the end of Q3, we have returned 98% of our non-GAAP free cash flow back to the owners of the company, consistent with our capital allocation strategy. The cash flow generation of the business continues to be excellent. Now turning to our expectations for Q4. As Kurt mentioned, we anticipate revenue to be about $3.3 billion, plus or minus about $100 million. At the midpoint, this is up 9% year-on-year and down 4% sequentially. We expect non-GAAP gross margin to be about 57.8%, plus or minus 50 basis points. Operating expenses are expected to be around $720 million, plus or minus about $10 million, which is down about 1% sequentially, driven by lower incentive compensation and discretionary spending. Taken together, we see non-GAAP operating margin to be 36% at the midpoint. We estimate non-GAAP financial expense to be about $81 million, driven by higher interest income. And we anticipate cash tax related to ongoing operations to be about $140 million or about a 13% effective cash tax rate, which is below our communicated model, leading to a full year effective tax rate of 13%. Non-controlling interest should be about $12 million. And for Q4, we suggest for modeling purposes, you use an average share count of 262 million shares. For CapEx, we suggest you use 8%, bringing total year CapEx to 8% versus our prior expectations of 10% due to delays in equipment deliveries. Finally, I have an update to our reported financials, beginning with our guidance for Q1 2023. We will begin to apply an estimated annual tax rate to our GAAP and, thus, our non-GAAP profit before tax. This change will enable NXP to report a non-GAAP earnings per share on a go-forward basis, consistent with SEC guidelines. Given current tax legislation, we believe our new estimated tax rate will be consistent with our long-term cash tax rate of 18%, as provided at our Analyst Day in November of 2021. Overall, despite the uncertain macroeconomic conditions which are impacting some of our more consumer-oriented markets, as Kurt mentioned, we will navigate what is in our control, such as channel inventory and discretionary spending. Furthermore, over the foreseeable future, we will continue to operate within our long-term financial model.

Hi guys. Thanks for letting me ask the question. Kurt, I wanted to ask about the inventory side of the equation, both on the channel and on your balance sheet. On the channel side of things, you guys are, like you said, well below target about 1.6 months, well below where you were at similar points where people were worried about us being at a peak cycle. So, I guess the question is, could you ship more into the channel if you wanted to? And what's led to the philosophical shift to significantly lessen the channel and more on your balance sheet as in prior cycles it seems to be the opposite prioritization?

Yes, good morning and thank you, Ross. The answer is definitely yes. We could have shipped more into the channel for open orders in this fourth quarter, especially in the consumer IoT segment. However, given the current macroeconomic uncertainty, we believe it is more prudent to limit channel inventory to a low level of 1.6 months. This is significant because the difference to 2.5 months in terms of revenue would be around $500 million, and that's the level of open orders we could easily fulfill. Nonetheless, we feel it's wiser to keep what we have in house and on the balance sheet for the possibility of redirecting it to other customers in the future. On the other hand, in the auto and core industrial sectors, we face the opposite issue—we do not have enough supply and continue to be sold out. If we had enough supply, we could generate more revenue in the fourth quarter, as we have many real open orders that we can't fulfill. To reiterate, yes, we could sell more, but we believe it's wiser to maintain the low channel inventory of 1.6 months for now. This isn't a long-term target, but at this specific point in the cycle, we feel it's the best course of action.

Thanks for that color. I guess as my follow-up, one is for Bill on the gross margin side of things. I'm impressed that the gross margin is staying flat, maybe surprised would be the word more than impressed, given that the revenues are dropping 4% or so. Your predecessor had a very rough rule of thumb that a 5% drop in revenue was a 1% drop in gross margin. So how are you able to keep that flat? And what's the sustainability of that ability to keep the gross margin at this general level?

Yes. Thanks, Ross, for your question. And you're right, we did slightly better than our guidance driven by the higher revenues and fall-through. One area I think we need to understand a little bit better is that our internal utilizations remain in the high 90s as we are still well constrained specifically in our auto. And if you think about internally, more than two-thirds of our capacity is just pinpointed to our IP proprietary mixed-signal, auto-centric capacity internally. And we are constrained. As you heard Kurt mention, we are sold out, and we expect this to be well-utilized all throughout 2023. Second, as mentioned on previous calls, you're right, we mentioned we'd stay in a tight range, delivering toward our high-end model. And I think we've demonstrated that, and it's incorporated in our Q4 guide. And more longer term, what gets us to 58% is really those new product introductions, which are further out in the journey, I would say.

Thank you.

Thanks Ross.

Yeah, good morning. Thank you for taking the question. I guess, the follow-on on Ross's question, I guess, can you comment on the ability at all to repurpose wafers capacity? My sense is internal versus external, the answer is no. And then as part of that, before coming to the recovery, you had a gross margin construct, I think, of every 5% change in top line, 100 bps growth in gross margins. Now that you see a clear mix shift here in terms of auto, core industrial holding strong, yet consumer weaker, is there kind of a thought process or model we should be thinking about on the gross margin side as we push forward into some sort of further correction on the consumer side?

Hey C.J. good morning. Let me first go at the repurposing or the potential for repurposing of capacity. So first of all, yes, I can confirm directionally that indeed repurposing between internal and external is very limited. I mean that's really how we've built our supply strategy. When you then think about within internal and within external, repurposing between the different segments which we serve, and that's now specifically between the more consumer-oriented versus the more auto or core industrial-oriented markets to a limited level, it is possible. It is typically not at all possible on a finished product level. So once the product is completely manufactured. And sometimes program, we have hardly any products which are swappable. However, if you still speak about buyback, inventory for example, we do have the opportunity with several process nodes to actually swap between those markets, but not with all of them. I'll give you one example which is quite sizable for us. We have a lot of product going in 55 nanometers with embedded nonvolatile memory that for example, is very, very purely automotive, which means we are sold out we are short in that technology, but that same technology is also not used for any of the consumer applications. So the demand drop in consumer doesn't really help us there. However, there are other technologies, like 90 nanometers or 180 nanometers, where we can do this if the product is not yet finished goods. So it's a bit of an in between, but we have some liberty here. And that is also the reason why, amongst others, for example in parts of our market in Q4, we start to see acceleration in our revenues because we actually could swap some of our existing capacity into those markets like the e-government markets or RFID markets, which were super constrained over the past 8 quarters. On the margin side, I’d say there is quite some variation of margin within each of the segments. So you cannot easily draw conclusions between the four revenue segments, what their mix is and what it means to the end margin of the company. It is more sophisticated, to be fair. Bill I'm not sure if you want to go a little bit deeper. But in the end, you cannot draw conclusions on the level of the total segment.

No, nothing else there.

CJ, did you have a follow-up?

Thanks guys. Yes, just a quick follow-up. The China IoT piece, I would have thought that that would have shown weakness earlier, so I guess, are there particular kind of sub end markets that have proven to be more resilient, at least until today, that's kind of enabled that to hold up or kind of can you give us a little more color on how to think about the key drivers within that bucket?

Yes. It really started in, I’d say, August and then going into October to quite significantly drop. But again, of course, our approach to stick to the 1.6 level of month of channel inventory gives this a different color, CJ. I mean, in former days, honestly, we would just have kept shipping. So it would have felt like, oh, finally, we get the channel inventory up. Now, it's very much our choice that we said we don't want to do this, and that's why it sees quite a harsh decline. But again, as I explained earlier, we think that's the better way to do it. But again, it started in August time frame. I would say, it's the consumer IoT market globally which is softening. It's just such that we have a relatively sizable exposure to China. But it's not that the non-Chinese consumer IoT customers would be still very resilient. I think this is globally weakening, but it hits us harder from a China perspective. And this is also where we have a very large channel exposure, which is why this general approach which I explained earlier, I think, makes a significant difference in how we want to deal with it.

Very helpful. Thank you.

Thanks for taking my question. Kurt, for my first one, I'm curious to get your perspective on just the supply-demand equation in the automotive industry at your OEM and Tier 1 customers. Do you think they're still undersupplied or oversupplied or just kind of rightly supplied? And just what are the hotspots of over or undersupply right now? And just how is your visibility of growth into the first half of next year? I think you've added Q4 flattish, which I assume is more a supply variable. But just what's your perspective into the supply-demand balance at your auto customers right now?

Yes, thank you, Vivek. Unfortunately, I can confirm that the flat performance in the auto sector going into Q4 is solely due to supply issues. While year-on-year growth is positive, the sequential performance is constrained by supply. Many microcontrollers and a significant portion of our analog products are still experiencing substantial supply limitations in the automotive sector. This assessment comes after a thorough analysis of demand throughout the entire supply chain, from OEMs to Tier 1. We have engaged in more transparent and detailed discussions than ever to understand these dynamics. Given the non-cancelable, non-returnable order levels from the automotive sector over the past year, we expect these supply constraints to persist into much of next year, contingent on any improvements in supply visibility. Presently, we project to remain sold out in the automotive market throughout next year. If you asked me about the gap to actual demand, our supply coverage for automotive and core industrial sectors is estimated to be around 85% next year. It’s also worth noting that there can be intermittent component shortages that may delay production, but overall, there is still a significant shortage in key microcontrollers and analog products.

Got it. So my follow-up, you continue to build inventory on your balance sheet. And when I couple that with the fact that you mentioned you're sold out in automotive and core industrial, that's almost two-thirds of your business, so is it fair to assume that you're planning for next year, I know you're not giving 2023 guidance, but are you planning for next year sales to be at least flattish year-on-year with auto and core industrial growth offsetting any weakness on the consumer side, or is that stretching right too much the conclusion from combining the fact that you still continue to build inventory and your auto and core Industrial demand is sold out for next year?

Hey Vivek, this is Bill. Let me take this one. First off, we're not guiding 2023, but let me go into the internal inventory and try to summarize for everyone. Yes, we've increased five days, which is about 50% raw material and work-in-process. And the remainder was in finished goods from a quarter-over-quarter perspective. Clearly, as Kurt mentioned, a portion of these finished goods was driven primarily by NXP preventing inventory buildup in the channel as we reroute this material to other customers in need or some of it's fungible and some of it is not. Areas where we have higher consumer or mobile inventory levels, we hold the wafers in die bank, as Kurt mentioned, before completing assembly and test in our back-end facilities. At the same time, we remain highly constrained in the wafer areas of 28, 40, 55, 65 and 90 in our auto and core industrial segments. And again, as we mentioned in both our opening remarks, it's better to keep control of your own inventory and putting it into the channel, which will just create future issues if demand falls. And again, majority of what we build is very application-specific and long-lived, which gives us confidence to hold and be ready to service future demand.

Thanks, Bill. Let me maybe just add that one view on next year when it comes to automotive since you were asking earlier. We see no reason why the strong trend of content increase following, amongst others, electrification and ADAS would break. I think every quarter, we look at the ratio of electric cars of the total SAAR is higher than in the quarter before. For this year, we see now 27% of the total SAAR being ex EVs. And for next year, it's forecasted to be 34%. And you know what that means for the semiconductor content in a car. So from that perspective, I think there is, from a demand view, certainly good reason to believe that it continues to be a very strong and very resilient market, while at the same time, the extended supply chain in our view continues to be underfilled. It is still actually dysfunctional because it is still too low level. So those two perspectives should maybe add to a pretty healthy view from an automotive demand perspective on 2023.

Thank you.

Hi, guys. Thanks for taking my questions. The first one, I get the issues in consumer and mobile. Those seem to be in the numbers now at this point. But auto and industrial look really resilient. You're sold out. You've got these NCNRs. I guess why do you sound so worried given that long-term support in those core markets and presumably given how sustainable it is, like, are you seeing any signs at all of weakness, even small signs, any tiny upticks in cancellations or anything like that in those core markets?

We have not seen any cancellations or delays in the auto or core industrial sectors. However, I cannot predict the economic outlook for next year. The guidance we provided is based on the current orders and supply capabilities for the fourth quarter. I can indeed confirm that there are no delays or cancellations in the core industrial and auto markets. One indicator that may offer some insight into the long-term situation is the inventory levels in the extended supply chains for these markets, which remain very low. This leads us to believe that these sectors should remain quite resilient.

Got it. Thank you. For my follow-up question, I wanted to, again, I guess, dig in on the channel inventories. So a lot of the consumer stuff which is weak goes to the channel, it sounds like you're not shipping that into the channel, but the channel inventories are still flat. So are you shipping other stuff into the channel that's making up for it? Like how is the mix, I guess, of end markets within that channel changing as the consumer stuff is weakening?

We will not discuss the mix because it complicates things. However, we do continue to ship into the channel to maintain a steady inventory level of 1.6 months. This doesn’t mean we have stopped all shipments; that’s not the case. We are very disciplined about this. Bill and I review sell-through and sell-in data weekly with each of our distribution partners by segment. We ensure that the inventory doesn't exceed 1.6 months, not just at the end of the quarter but throughout it. The only change I wanted to highlight is that for the past eight quarters, I was eager to increase inventory. I wished we could have shipped more to raise channel inventory levels. However, given current consumer trends, we are now more disciplined in keeping it from rising, especially in areas where actual demand exists. This does not imply that there are no shipments happening.

I understand that. I guess what I'm asking is, is it fair to say, even if you don't want to go to the mix, the consumer mix within the channel is lower and mix of other stuff is higher now versus maybe a couple of quarters ago?

No.

No? Okay.

I'm not sure why you think it should be. No, it is not.

Well, I mean, if the consumer stuff is so much weaker, you said it's 40% of your Industrial business, and a lot of it goes through the channel, and clearly, demand there is weakening. And it sounds like they're limiting shipments of that stuff into the channel. That's all. But the total inventories look the same.

Yeah, Stacy, we are limiting shipments. But I mean I think about it this way. The industrial IoT segment is 18% of the total revenue of the company, and 40% of that is the consumer IoT, and that's still not at a zero shipment level. So it is not that dramatic from a change perspective.

Got it. Okay. That’s helpful. Thank you guys. Appreciate it.

Sorry, I was muted. Thanks for taking my question. I'm hoping you might have some discussion in terms of the difference in demand levels and lead times and your level of constraints between automotive on the one hand and industrial on the other. I think in prior quarters, you've noted that industrial is even more constrained than automotive. That doesn't quite get the same level of attention. Can you update us on that dynamic, please?

We don’t have it broken down that way, but the key shortages in the core industrial sector remain highly escalated and quite painful. I can reiterate that while there are numerous public reports about shortages in the automotive sector and less focus on industrial, we are still facing the same shortages in core industrial that we did before. For the next few quarters, approximately four or five, we believe that after adjusting for risk in our demand, we should have about 85% coverage, which is an improvement from the previous 80%. This increase isn’t necessarily due to a significant rise in supply capability in either automotive or industrial sectors, but rather because the consumer IoT demand has decreased, allowing us to reach an aggregate of 85%. However, the situation remains equally challenging in both automotive and industrial as it has been.

Appreciate that. As a follow-up, I'd like to linger on this small pivot you're making in terms of the way you're dealing with the channel in your inventory. And I wonder if the company has evaluated potentially moving to a consignment-oriented model, which would allow you to make even more control. There's only one company that I'm aware of that has perceived that in a big way this sort of an outlier in terms of how to deal with distribution. But I wonder if that's a growing thought given your approach that you're discussing today? Thank you.

Thanks, Bill. But that's a quick answer, no, we are not contemplating that.

Okay. Thanks.

Hey guys. Thanks for taking my question. I wanted to talk about one of your smaller businesses for a second, and that is the mobile side of the business. You highlighted what sounds like 8% upside to your Q3 revenue forecast for that particular business. And we step back and look at the full year. Based on your Q4 guide, you're going to grow that business by close to 10%, which is counterintuitive given some of the weak mobile handset-related data points. So what's helping you outperform there? Is it content growth, or is it inventory channel related?

It's got nothing to do with channel or inventory because we put the same discipline on all segments. Now it has to do with our strategy, which is really on content growth. Think about the mobile wallet. Think about the kicking in ultra wide bands. And we also have, I'd say, directionally, it's not black and white, but we have a bias to higher-end mobile phone market, which comparably is doing better this year than the very low-end Android. So I'd say, therefore two answers. Our company-specific content increase in share gains are working out. I mean, that is very much in line with how we put it a year ago at our Investor Day. And secondly, you might say we are in a good position because we are somewhat more exposed to the higher end rather than the feature phones, with the Android phones.

Thanks for that. As my follow-up, I want to ask about the latest US export restrictions. My hunch is you're not so much directly impacted from these US export restrictions. But I guess indirectly, can you speak to how it may result in some kitting issues in certain end markets and/or whether it requires you to change your manufacturing footprint?

Yes. So first of all, of course, at all times, we will 100% make sure that we are in total compliance with any export control regulations, and so we are also after these latest changes. All of our assessment so far of these latest changes in the regulations show that, if anything, we have super immaterial impact on our revenues. When it comes to second or third order effect, which you were hinting to, also there I must admit we haven't really found anything, which looks like being an issue for us. But of course, we keep researching it. But at this point, I can only say no, if anything, only super immaterial impact.

Thanks, Kurt.

Good morning. Thank you very much. Kurt, for my first question, you were very clear about the trends in your Automotive business and the business continues to do quite well. And I think to an earlier question, you mentioned that sort of on a quarterly basis, the SAAR numbers and the LTL 3 penetration numbers of ADAS continue to kind of go higher in your own estimates. But how do you guys made any changes to those kind of mix and content assumptions in the next year or two just based on interest rates? I think a lot of us externally saw some of the data out of CarMax and some other sources and the auto. New car purchases are obviously financed pretty heavily. So is there any assumptions that might have changed recently in your forecasting based on some of the interest rates? That would be interesting. Thanks.

Yes, Matt. I'll provide two answers. The short-term guidance for Q4 is based on current orders. While there's some decline, our focus is not on strategic considerations for the next three months; it's primarily about orders and supply capability. Looking longer term, I can't predict the future, but we typically use IHS for the SAAR, which recently updated their forecast for next year to about 4% growth, around 85 million units. However, this isn't the main focus. What's truly important is the increase in content, which relates to the shift towards electric vehicles, premium vehicles, and additional features. I acknowledge that discussions about interest rates and potential recessions could impact consumer demand for cars. However, unless demand falls significantly, the semiconductor content per vehicle is likely to influence the SAAR more than anything else, which is more relevant for us. Still, we don't provide guidance for next year. We should increasingly view ourselves as a semiconductor company and the industry from a content perspective instead of just a unit perspective in automotive.

Thank you for that question. It's definitely a broad and complex issue, but it's one we're encountering. As a follow-up, I wanted to ask about the automotive sector. You clearly have a solid position in battery management systems, which involves both operating the vehicle and managing the charging. There's ongoing discussion about battery semiconductors and their implications for onboard fast chargers. Are you considering a fully integrated solution for managing both the charging and discharging of batteries? This wouldn't involve manufacturing on your part but rather acquiring from another source. Any insights on this would be appreciated. Thank you.

We not only examine the system, but we also manage it comprehensively. We are actively engaged with companies that build and provide charging infrastructure. For instance, we collaborate closely with ChargePoint in the US. Our partnership extends beyond just charging; it includes payment solutions to create a seamless experience for consumers. Our technologies for payment, identification, and security are part of this integration. We view this from a holistic perspective. However, I should note that we are not venturing into discrete power solutions. For applications requiring discrete power, like silicon carbide, we do not focus there. Our emphasis remains on advanced analog and logic products, which we believe represents about 50% of that market opportunity.

Josh, we’ll take the next question please.

Great. Thank you. I know last quarter you guys have talked about the desire of the automotive companies to build up safety stock at the Tier 1 level. I think you talked about six months. Where are they in that process? I mean it definitely sounds like things are still pretty tight, but is there any indication that they're able to put any of that inventory into place?

Indeed, that is a strategic requirement that OEMs are placing on Tier 1 suppliers. It's difficult to grasp the full extent of the situation, but in some instances, they are beginning to build on many of the core products that have been causing challenges in terms of performance. However, they are still far from making significant progress. Before anything substantial can happen, the entire supply chain needs to increase its inventory levels. This isn't just an issue for one company; the whole system must become more efficient. Therefore, based on current demand trends and my assessment of our supply capabilities and those of the industry, it will likely take all of next year before we approach that requirement.

Great. Thank you very much.

Hi. Good morning. Thanks so much for squeezing me in. I have two questions. First one is on pricing. I think if we take the midpoint of your Q4 revenue guidance, you're going to be growing around 19% for the full year. I think you gave really good color last quarter on how significant the tailwind is from pricing. If we can get an update on 2022 pricing, that would be great. And then your preliminary thoughts into 2023, again, from a pricing perspective particularly given, I think, the intent on your foundry supplier to raise pricing next year as well.

Yes, Toshiya. As we've done in previous years, we will provide the full year pricing impact for 2022 in the first quarter of 2023. The situation is very dynamic, changing almost daily. We will share the overall pricing impact on our revenue growth for this year during Q1 of next year. From a broader perspective, we are observing considerable decreases in input costs from our foundry partners, although there are still various inflationary cost increases to contend with. We are committed to our strategy of passing these input cost increases onto our customers to preserve our gross profit percentage. Given the ongoing shifts in supply and demand in our core markets, it seems reasonable to expect that we will continue to increase prices next year. As we approach the end of 2022, it's quite likely that we will maintain next year's pricing in line with these input cost increases.

That's helpful. Thank you. Sorry.

Yes. Go ahead.

Sorry about that. As my follow-up, just on how you're thinking about utilization rates and CapEx going forward, Bill, you talked about utilization rates being in the high 90s, given your comment on inventory growing in the quarter, my guess is you're keeping utilization rates to where they are but just wanted to clarify that. And then on CapEx, you mentioned you've had equipment delivery delays. Should we expect CapEx to be elevated into 2023, or is it a little bit premature to say at this point? Thanks so much.

So let me quickly take the utilization, and Bill is going to speak about CapEx. On the utilization, yes, we will stay very, very highly utilized because, as Bill put it earlier, the majority of our internal front-end factories are working for automotive and core industrial. So that's exactly there where we see the strong demand continuing, and that's why the utilization rates there will stay very high. Bill, over to you for CapEx.

Yes. Related to the CapEx, as I mentioned, we will do better this year, 10% going to 8%. And next year, we will be in the range between 6% and 8%.

Thanks so much.

Yeah. I guess that gets us to the end of the call. So in summary, I would say we are cautious in the near-term given all the macro uncertainty. However, under the surface, we see what I call the dichotomy, which is really a very disciplined approach to a weakening consumer IoT market, where we want to stay ahead of the game and not trap the channel while, at the very same time, we continue to be supply constrained quite significantly in our core industrial and automotive markets, where we try to do everything in-house and with our foundry partners to get the supply the soonest in line with the pretty resilient demand signals, which we are having. And that sets it for the call today. Thank you all very much. Thank you.

Thank you, Josh. Appreciate everybody's attendance. That concludes the call today.